Bargaining with a Residual Claimant: An Experimental Study

Abstract

Many negotiations involve risks that are only resolved ex-post, and often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant faces ex-post risk, whereas a fixed-payoff player does not. In line with the predictions of a benchmark model, we find that residual claimants extract a risk premium, which increases in risk exposure, and that this premium can be high enough to make it beneficial to bargain over a risky rather than a risk-less pie. In contrast to the model’s predictions, we find that the comparatively less risk averse residual claimants benefit the most from risk exposure and this is driven by fixed-payoff players’ adoption of weak bargaining strategies when the pie is risky. We find evidence for a behavioral mechanism where asymmetric exposure to risk between the two parties creates a wedge between their fairness ideas, which shifts agreements in favor of residual claimants but also increases bargaining friction.

Keywords: Bargaining, Ex-post Risk, Reference Points

JEL Classification: C71, C92, D81